Now retired, Lynch secured his reputation as one of the most
successful fund managers in history while in charge of the Fidelity
Magellan fund between 1977 and 1990. During the 13 years until his
retirement in 1990, Magellan was the top-ranked general-equity mutual
fund. A $10,000 investment in Magellan in 1977 would have grown to
$288,000 by 1990. During this period Lynch achieved and average annual
return of 29%.
When Lynch assumed the management of Magellan in 1977, the fund had
$20 million in assets. By 1990, when he decided to take early
retirement, its value had grown to $14 billion. During the 13 years that
Lynch ran the fund, Magellan failed to outperform the S&P 500 stock
index only twice. No fund manager in history has ever ran so large a
fund, so successfully, for so long. What is truly exceptional is that
Lynch was able to maintain such high returns even after their fund's
assets had swelled.
Although it is very difficult to emulate Lynch's portfolio management
style, Lynch insists that small investors can research stocks better
than most professionals. This is because individual investors are often
better positioned to spot profitable investments earlier.
Moreover, they are always free to act independently. By contrast,
many Wall Street professionals are constrained by committees, trustees
and superiors.
Below are a few of Peter Lynch's investing principals:
Invest in What You Know
Lynch's key concept is that you can spot investment opportunities
all around you by concentrating on what you already know and are
familiar with. Lynch always invested in industries he understood, even
if that business operated in a sector or industries that was forecasted
to deliver lackluster performance. One such example was his investment
in Chrysler in the 1980s. Chrysler was near bankruptcy at that time, but
after seeing prototypes of its new minivan, Lynch made Chrysler one of
Magellan's top holdings. Chrysler more than tripled in price in
subsequent years.
Seize a Good Opportunity
Lynch was always on the hunt for above-average profit opportunities.
Although he liked value stocks like Chrysler, he also invested in
fast-growing up-and-comers such as Hanes Co. Hanes' stock
appreciated six-fold while Magellan held it.
Profitability, Price, and a Good Business Model
Lynch generally looked for three qualities in a good company:
profitability, price, and a good business model.
Check the key numbers.
1. If you are excited by a particular product or service, ensure that it
accounts for a sufficient percentage of total company sales and that it
makes a significant contribution to profits.
2. Favor companies with a strong cash position
3. Favor companies with a forward PE ratio well below their forecasted
EPS growth rate
4. Avoid companies with high debt-to-equity ratios.
5. Avoid slow growers and cyclical stocks.
Do Not Hold Cash
You should always stay fully invested, otherwise you will likely miss
out on market upswings. Ignore the ups and downs of the market.
Your profits and losses do not depend on the economy as a whole. Buy
whenever you come across an attractive idea with a compelling story
behind it.
Know When to Sell
Sell your bellwether holdings when their PEGs (calculated as PE
dividend by a firm's projected earnings growth rate) reach around
1.2-1.4, or when a company's long-term growth rate starts to slow.
Sell fast growers when there appears to be no further scope for
expansion, or when expansion starts to produce only disappointing sales
and profits growth, or when their PEGs reach around 1.5-2.0.
Sell asset plays when they are taken over, or when assets that are
sold off fetch lower-than-expected prices.
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